The SEC is making changes to 12b-1 fees in the latest sign costs are coming down for investors.

The Securities and Exchange Commission decided to make changes to 12b-1 fees that mutual fund firms charge to help defray marketing costs. The rules would both limit what investors pay in ongoing sales charges and require more clear disclosure of costs by fund companies.

For example, if one class of a given fund charges a 4 percent front-end sales charge paid when it is first purchased, another class couldn’t charge more than 4 percent in total to investors over time. The fund would keep track of how long investors have been paying ongoing sales charges to make sure the ongoing fees stop once the limit is reached, the SEC said in a press release.

The SEC proposal, which will include a 90-day public comment period once it’s published in the Federal Register, is part of a trend putting downward pressure on fund fees and requiring fund companies to disclose more explicitly the costs they charge. The arrival of ETFs, which generally have much lower management fees than mutual funds and typically don’t charge 12b-1 fees, has helped pushed mutual fund fees down. The first ETF was launched in 1993.

Despite paying billions of dollars, many investors do not understand what 12b-1 fees are, and it’s likely that some don’t even know that these fees are being deducted from their funds or who they are ultimately compensating, SEC Chairman Mary Schapiro said in a press release.

12b-1 Details

12b-1 fees were developed in the late 1970s when funds were losing investor assets faster than they were attracting new assets, and self-distributed funds were emerging in search of ways to pay for necessary marketing expenses.

These fees amounted to an aggregate of just a few million dollars in 1980 when they were first permitted, but that total has ballooned as the use of 12b-1 fees has evolved. These fees amounted to $9.5 billion in 2009.

Under the SEC proposal, funds could continue to pay 0.25 percent per year out of their assets for distribution as marketing and service fees, for expenses such as advertising, sales compensation and services. These charges have always been one of the cornerstones of 12b-1 fees.

Because of the confusion and lack of clear disclosure, the SEC proposal would require funds to identify and more clearly disclose their distribution fees, the press release said.

In particular, the fund would have to disclose any ongoing sales charges and any marketing and service fees in the fund’s prospectus, shareholder reports and investor transaction confirmations. Transaction confirmations also would have to describe the total sales charge rate that an investor will have to pay.

“Our proposals would replace rule 12b-1 with new rules designed to enhance clarity, fairness and competition when investors buy mutual funds.